Question

should one invest in stocks or bonds? How would you advise someone to make their investment choices? In your discussion, highlight the features of each investment choice and when stocks may be preferred over bonds and vice versa.

Answer 1

To invest in stocks or bonds depends on a lot of factors such as willingness to take risk, capacity to take risk, time horizon, return objective, liquidity requirements and other special factors.

Stocks have historically had higher returns than bonds, but the higher return comes at the cost of higher risk. Bonds are relatively lower risk than stocks, but also offer lower potential returns.

For an investor with high willingness / capacity to take risk, stocks are a better choice

For an investor with high liquidity requirements (for example - an investor who depends on investment income for living expenses), bonds are a better choice as they pay interest. Stocks pay dividend, but the dividend yield is low compared to bond yields.

An investor with a higher return objective should choose stocks over bonds, but they should understand that this involves higher risk

A longer-time horizon for investment is more suitable for stock investments because stocks offer higher compounded returns over longer time periods.